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The Future of Urban Research: Nonmarket Interactions [With Comments] Author(S): Edward L

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The Future of Urban Research: Nonmarket Interactions [With Comments] Author(S): Edward L The Future of Urban Research: Nonmarket Interactions [with Comments] Author(s): Edward L. Glaeser, Vernon Henderson and Robert P. Inman Reviewed work(s): Source: Brookings-Wharton Papers on Urban Affairs, (2000), pp. 101-149 Published by: Brookings Institution Press Stable URL: http://www.jstor.org/stable/25067375 . Accessed: 02/10/2012 13:34 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Brookings Institution Press is collaborating with JSTOR to digitize, preserve and extend access to Brookings- Wharton Papers on Urban Affairs. http://www.jstor.org EDWARD L. GLAESER Harvard University The Future of Urban Research: Nonmarket Interactions modern growth theory argues that intellectual spillovers?ideaflows among individuals that are not mediated by themarket?are a linchpin of eco nomic progress. In Paul Romer's seminal work, endogenous economic growth requires increasing returns.1Without nonmarket intellectual spillovers or some form of externality, increasing returns and economic competition cannot coex ist. In Romer's now canonical model of growth, idea flows are seen as the basis for economic progress; the robust relationship between human capital and economic growth has been taken as support for the importance of these intellectual spillovers. Social capital theory argues that "social capital, connections, social net works are much more correlated with human happiness than is financial capital."2 In large surveys such as the General Social Survey (GSS), measures of social connection (such as churchgoing or membership in organizations) aremore strongly connected with self-reported happiness than income is. This body of research also claims that nonmarket social interactions (for example, membership in choral societies) are an important factor in determining the success of governments and societies at large. Social ties among individuals are thought to be critical in overcoming citizens' apathy and "making democ racy work."3 These two large, separate literatures have independently concluded that non market interactions are extremely important. Only an economist could be surprised by such a deduction. The tendency of economists to ignore these 1. Romer (1986). 2. Putnam (1999). 3. Putnam (1993). 101 102 Brookings-Wharton Papers on Urban Affairs: 2000 interactions has led us to disregard critical segments of the economy. Over the next ten years, I believe that nonmarket interactions will be at the forefront of economic research. There are isolated examples of research on nonmarket interactions in urban economics, including Alfred Marshall's famous analysis of human-capital transfers in agglomerated areas and Jane Jacobs's discussion of idea flows among innovators in cities. Work on ghettos and discrimination has indeed often addressed the existence of nonmarket interactions.4 But traditional urban economics, such as research on real estate, has been primarily oriented toward themarket.5 Papers on local public finance often address externalities but treat them usually as mere assumptions and rarely in depth. Even the seminal work of Paul Krugman in part derives its strength from its ability to explain eco nomic agglomerations without resorting to ad hoc external effects.6 Nonmarket Interactions and Cities Nonmarket interactions occur when one individual influences another with out the exchange of money. The first kind of these interactions involves voluntary participation of both individuals. Neighbors' doing favors for one another is an example of this kind, and this fits our usual paradigm?there is a cost for one person and usually a benefit for another. In some circumstances, such interactions could be done through the market (that is, you could pay your neighbor every time he lent you his rake). These interactions do not involve cash, mainly because they are sufficiently small and sufficiently common that reciprocity saves transaction costs. Occasionally they are done out of altru ism (for example, caring for a sick friend). In some cases there may even be a social stigma attached to using or accepting money for a particular service (for example, donating organs). In dense urban areas, where the extent of the market is great, these inter actions may evolve from nonmarket interactions into market interactions. For example, in a small town a relative may serve as an amateur nurse for a sick 4. Researchers in this area have emphasized ghetto residents' lack of informational access tomainstream society. Taste-based discrimination (as opposed to statistical discrimination) also reflects a nonmarket interaction inwhich proximity to one group appears to cause psychic harm to others. 5. Urban sociologists such as Wirth (1938) have given these interactions more attention. 6. Krugman (1991). Edward L. Glaeser 103 outpatient because professional nurses are rare. In a large city, this service might more commonly be performed in the context of a market. The second kind of nonmarket interactions are classic externalities?for example, the positive effects of role models, or acquiring human capital through the observation of a neighbor's successes and failures.7 In these cases, it takes effort to stop the interactions?that is, unless the influencing party specifi cally works to stop the other party from observing, the interaction will take place (at no cost to the influencing party)?so it ismuch less natural to imag ine such interactions' being regulated by the market. Often physically proximate individuals create both kinds of nonmarket interactions with one another. For example, my research is improved by the work of my colleagues both because of the actions they take to help my work (reading my papers, talking tome), which impose costs on them, and because I learn by watching them do research. Spatial proximity (and hence urban density) facilitates the first kind of non market interaction, as proximity makes reciprocal relationships easier to start and maintain. The second kind of interaction even more strongly depends on spatial proximity. In many cases, these effortless transmissions of ideas and values depend on sight or hearing. Even if the affected person has not seen or heard the influential person himself, it is often true that he knows someone who has had this personal contact. Obviously, the ability to see or hear depre ciates sharply with space. Indeed, empirical evidence supports the idea that the effect of this prox imity on nonmarket transactions is large. The work of Adam B. Jaffe, Manuel Trajtenberg, and Rebecca Henderson shows the extent to which patent cita tions decline with physical distance. Survey data show that the correlation between distance (measured in time to arrive) between friends and frequency of contacts is 64 percent.8 In nonmarket transactions (particularly of the second kind), individuals rarely receive the full social returns for their actions: these transactions are rife with externalities. When spatial distance deters standard trade, the increase in transport costs will only reduce market transactions that have social bene fit equal to or less than those costs. Because of the externalities associated with nonmarket interactions, however, an equal increase in transport costs will reduce social interactions with social returns thatmay be much larger than the 7. SeeWilson (1987). 8. Jaffe, Trajtenberg, and Henderson (1993); and author's calculations from the General Social Survey. 104 Brookings-Wharton Papers on Urban Affairs: 2000 change in costs. This might explain why small differences in the architecture of work environments (the presence of an office lounge, the arrangement of offices in close proximity) might make a large difference to the overall qual ity of social connection in the organization. Urban economics needs to increase its focus on nonmarket interactions because they are central to an understanding of causes and effects in cities. The example of Paul Krugman illustrates that a brilliant theorist can explain cities without addressing nonmarket interactions.9 But it is less obvious tome why one would want to do so. The flow of ideas and values that occurs through face-to-face interaction may be the most interesting feature of cities. Further more, the market for space?that is, the real-estate market?also appears to be driven to a large extent by the relative presence or absence of particular forms of nonmarket interactions in different areas. Urban economics cannot continue tomake progress toward understanding its basic issues, namely, the causes and consequences of human density, without learning much more about nonmarket interactions. Since nonmarket interactions are so determined by space, and the spatial organization of economic activities is so determined by nonmarket interac tions, the expansion of study into nonmarket interactions is naturally the province of urban economists. This paper first argues that space is crucial in understanding nonmarket interactions. I then identify areas that urban eco nomics must explore in the future. I begin with idea flows and human-capital spillovers in cities. I then discuss peer effects and
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